Deepening intra-regional collaboration will reinforce stability of capital markets: SEC DG

• Following is the address by Securities and Exchange Commission of Sri Lanka (SEC) Director General Vajira Wijegunawardane at the 17th Cross Training Seminar of the Asia-Pacific Central Depository Group which began on Tuesday in Colombo with Central Depository Systems (CDS) as the host.

I am honoured to have been given the opportunity to address you this morning at the 17th Cross Training Seminar of the Asia-Pacific Central Depository Group (ACG).

In 1997 the ACG was formed with 14 central securities depositories and clearing organisations and has grown significantly and at present comprises of 32 depositories and clearing organisations from 23 member countries. 

Usually most countries have only one depository and this gives limited opportunities for depositories to learn and grow. A regional platform such as the ACG allows depositories to strengthen their bonds as well as engage in open discussions. Your presence here indicates your strong commitment to develop channels for dialogue with other jurisdictions and benefit from each other’s experience.

In any jurisdiction a capital market regulator’s job is to have a sound regulatory framework and to facilitate the enabling of necessary market infrastructure. 

Financial market infrastructures are key components of the financial system and comprise of a set of rules, processes and operational arrangements for managing the inherent risks arising from transactions between market participants. Therefore, they play a pivotal role in helping financial markets to function. On the other hand any disruptions to market infrastructure will not only erode investor confidence and threaten financial stability but lead to financial contagion. It is in this context that regulators have recognised the need to ensure that financial market infrastructure that gives rise to systemic risk must be robust as possible and capable of withstanding any financial storm.

The 2008 financial crisis as well as other recent financial crises revealed that excessive risk taking was the main cause of systemic risk among others and interconnectedness of market participants led to a ripple effect. Market participants who were considered ‘too big to fail’, had to be recapitalised to prevent losses and these events clearly demonstrated the devastating effects of systemic risk. 

Following the crisis all stakeholders have put in tremendous efforts to improving the resilience of the global financial system and have discovered that central clearing and settlement via central counterparties (CCP) is the best mechanism through which contagion and uncertainty can be mitigated. In addition, CCPs have clearly demonstrated their importance during financial crises, since they were able to protect markets against shocks mitigate defaults and serve as loss absorbers. 

In 2012, the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organisation of Securities Commissions (IOSCO) issued more demanding international standards for payment clearing and settlements which are able to provide more comprehensive criteria to cover new risk management areas and new types of financial market infrastructure to strengthen and harmonise the existing standards. Going forward, these will be the minimum standards a country’s payment, clearing and settlement system should strive to maintain.

It is envisaged that financial market infrastructures will take swift and appropriate action to meet the standards laid down and that regulators will endeavour to include the legal and regulatory framework as part of their regulatory, supervisory and oversight activities.

By strengthening regional cross-border regulatory cooperation and by implementing effective regulations and enhancing market infrastructures it is possible to build robust capital markets in the region that can provide various sources of financing to support the growth of the real economy. But on the other hand markets in the region are diverse in size and are in different stages of development. These differences may impede cross border trading from taking place effectively.  

Therefore as an initial step towards facilitating cross border trades we believe the regional markets should at least aspire to align their domestic regulations as well as market infrastructure with globally accepted standards and practices. 

In the Sri Lankan context on the equity space there exists a settlement risk in the absence of DVP and an asset commitment risk as securities move on T day and settlement of funds is made on T+3. We have been extremely fortunate to have not experienced any settlement failures.

In the Government Securities sphere too, the settlement risk exists and certain counterparties do not trade with one another. 

As such the Securities and Exchange Commission Central Bank of Sri Lanka and the Colombo Stock Exchange made a decision to fast track the implementation of a fully integrated CCP mechanism for the financial market as a joint initiative to be in line with BIS and IOSCO standards. This will enable our capital market to be reflected on a positive light among foreign institutional investors and also aid our medium term objective of elevating the CSE to MSCI Emerging Market status.

I am of the view that deepening intra-regional collaboration will reinforce the success and stability of the capital markets and will contribute towards mobilising capital. I wish to congratulate the Central Depository Systems Ltd for hosting the 17th ACG Cross Training Seminar. I hope that the deliberations among the depositories in the Asia Pacific region will be fruitful and be instrumental in facilitating exchange of information, promoting mutual assistance and encouraging local markets to adopt best practices.

In conclusion, I would like to wish you a stimulating and productive seminar and hope you will make use of this opportunity to build safe resilient and vibrant regional capital markets.